Fare families may be all about flexibility, but can we understand them?

Feb 1, 2013

Airlines are currently looking at how to assemble their fare families in a way that makes the offer clear to passengers and enhances revenue. EyeforTravel’s Ritesh Gupta explores how airlines are targeting multiple price points, while bringing their ancillary and family strategies together.

Passengers are frequently concerned about booking directly via an airline website, often due to fears about debit-card charges, hand-baggage allowance or seat selection. In this context, airlines are trying to ensure that their fare structure is appropriate and they end up adopting transparent pricing.

In December, American Airlines introduced a new fare structure that effectively rebundles certain a la carte ancillary services into a new fare. A few months earlier, Singapore-based airline Scoot, which was launched last year, chose to adopt an approach based on the no-frills concept of low fares with add-on options to customise the traveller’s own experience. As part of this approach, the airline created Fly, a no-frills, no-baggage product, and product bundles, FlyBag and FlyBagEat, which provide an a-la-carte selection of frills. In Europe, Flybe also announced new ticket types. In its research, it found that even though lots of passengers preferred an all-inclusive price early on in the booking process, there were others who wanted the freedom to put together their own package. So the airline chose to offer both the options.

David Stoyle, head of revenue practice, airline consulting, Amadeus IT Group, says currently there are two main ways airlines are bringing their ancillary and family strategies together:

• Some have a fixed price for a few benefits.

• Others have a raft of options and sophisticated price structure. You can take a family and add or subtract specific attributes.

“Part of the reason for the different levels of sophistication comes from the range of attributes (eg, extra legroom and priority boarding) available to the airline. The other part comes from the technical ability to present, sell, and fulfil the features,” says Stoyle.

Price points

The most significant change in airline pricing over the last decade has been the decision by most network carriers to unbundle services formerly included with their tickets, most notably baggage and meal services, but also such benefits as same-day stand-by. This, according to Alex Dietz, principal product manager, SAS,has allowed the airlines to find new sources of revenue through direct payment for the services, as well as partnerships with credit-card firms.

“According to Amadeus, 50 airlines reportedly produced in excess of $22 billion in 2011 from charges for these ancillary services,” says Dietz. “Prior to this movement, the most significant trend was the elimination of many traditional fare restrictions used to segment customers – restrictions that allowed the airlines to distinguish price-sensitive customers from service-sensitive customers.”

As a result of these changes, many airlines have adopted an approach to pricing referred to as fare families.

Fare families are groups of fares with different sets of benefits/restrictions. So, for example, one fare family might offer the lowest price, but no ability to stand by for an alternate flight, and a full cancellation fee. Another fare family might offer the ability to stand by and no cancellation fee – but for a higher price.

Each fare family can have multiple price points, which are managed by revenue managers (and revenue-management systems) on a day-by-day flight-by-flight basis.

Finding your fare

Most airlines that have taken on this approach have gone for clear naming for each fare family to help customers to easily understand the pricing and restriction options across different markets. In the US, American Airlines, brands their coach-cabin fares as ‘Choice’, ‘Choice Essential’, ‘Choice Plus’, and ‘Fully Flexible’. In Europe, Swissair takes a similarly straightforward approach, branding their coach fares as ‘Economy Saver’, ‘Economy’, and ‘Economy Flex’.

Fare families have the added advantage of being much easier to market to customers – because the nature of the product can be communicated to customers across many markets.

Airlines are having to put a lot of thought into the design of fare families, and are looking at how to capture business through the low-fare search tools used by travellers, as well as how to improve revenue by showing the value of higher-priced offers.

On trend

American Airline’s new initiative is a further step in the direction of unbundling services – a direction which many airlines view as highly beneficial from a revenue perspective, with some exceptions, including Southwest Airlines which has been particularly against unbundling and add-on charges, in general.

In another emerging trend, airlines are starting to take advantage of growing GDS capabilities for distribution of fare families through the travel agents. “This is key,” says David Stoyle, “because the revenue opportunities are massively increased by breaking beyond the limits of the website.”

Looking at ancillaries, Stoyle says, all airlines are earning money through some form of ancillary revenue. “Many are now seeing it as a vital means to grow revenue. When we work with carriers on ancillaries, the first thing we do is to position them according to brand, size, and amount of ancillary revenue. When you look at the output, some airlines are really performing far better than others that are comparable in pretty much all other respects – so it really is a question of focus and priority,” he says.

As carriers become more sophisticated with merchandising, they can integrate their ancillary and fare-family strategy. “This is when the fun really starts! It’s a tough job to build a coherent approach, but for the ones that get it right there is big money to be made,” says Stoyle.